May 16, 2017

The Consequences of Not Understanding FX Results in Time

If it’s the end of the quarter and you need to close the books in a few days – can you adequately explain the FX results to senior management with confidence?  Shortly before the end of a fiscal period, an unexpected exposure hits the books, resulting in a significant FX loss. Are you ready for the ensuing firestorm from senior management (and company shareholders, if FX impacts need to be called out on an earnings call)?

If your company is making one or more of the common risk management mistakes outlined in our previous blog 10 mistakes in FX Risk Management , or relies too heavily on spreadsheets in managing FX exposures, your answer to these questions will more than likely be “no”. There is inevitably going to be a mismatch between the underlying exposures and the hedges meant to neutralize them for a number of reasons. Intra-month adjustment trades, forecast deviation, forward points, and incorrect and/or catch-up re-measurement entries can all affect your results to various degrees.

Lacking the resources to understand financial results driven by currency exposures in a timely manner can impact shareholder value, fuel ineffective FX risk exposure management if root causes are not identified or understood, and even derail the career of a treasury professional.

The ability to quickly isolate these factors is critical in helping senior management understand the immediate net currency impact on the financial results, as well as offeringa quick feedback loop to improve the next period’s hedging.

  • So, what is required to address these challenges and avert the consequences of not being able to quickly understand your FX hedging results? Integrability of business systems including a company’s ERP and any systems used in identifying, monitoring, and managing FX risk exposures.
  • Having good communication between treasury and other departments within an organization to understand any internal or external dynamics that can impact all relevant global currency flows.
  • An understanding of all the key drivers that impact the FX gain/loss line in the company’s income statement.
  • Drill down capability into the transactional details of the ERP system(s), as well as the ability to identify all re-measurement inconsistencies.